Value Unleashed

Articles - May 2019

Is Corporate Canada sitting on mountains of “dead money” rather than investing it productively? Mark Carney, former Bank of Canada governor, famously stated so back in 2012, suggesting a level of caution amongst business leaders that “could be regarded as excessive”. Carney worried that this excessive caution, or lack of courage, would limit Canada’s ability to compete in the global economy. Read our full article to find out more.

“Larger corporate acquisitions buttress deal value”. This is the headline in PitchBook’s recently releasedGlobal Q3 2016 M&A Report. While the report notes that deal count dropped off considerably in the third quarter, average deal value continued to increase (up 42% over Q1) as acquirers, armed with excess cash and highly valued stock currency, bid up valuations on a decreasing pool of quality targets.

Recent acquisition activity, as set out inPitchbook’s Global Q3 2016 M&A Report, gives us cause for pessimism. As we have notedpreviously, factors relating to negative outcomes are pervasive in current transactions. This week, however, our focus is on the positive as we consider an M&A strategy that is proven to create value.

“It was the best of times, it was the worst of times…” a reference to Dicken’sTale of Two Cities, or alternatively, the contrast in year to date activity for Canadian Venture Capital (VC) versus Private Equity (PE).

Pitchbook’s recent report,US PE Breakdown 3Q 2016reveals 2016 YTD results that do not surprise. Investors are reaching down-market, targeting smaller, less expensive add-ons to mitigate the inflated valuations of larger, platform acquisitions. Add-ons represented a whopping 64% of buyout activity for the first 9 months of 2016, the highest level recorded in a decade.

Slow organic revenue growth is an issue for many companies – over the past twelve months, revenue growth for S&P 500 companies was an unimpressive 2.5%. This week, however, we are reporting on an interesting twist: U.S. middle market companies are outpacing their larger counterparts by a strong margin, and PE owned companies are leading the pack.

When buyers consider an acquisition target, the focus is typically on strategic fit and valuation. The subsequent due diligence process is used as a security blanket to validate the buyer’s vision of the target. However, the typical due diligence checklist doesn’t address the subjective areas of the business – those involving people, culture and processes – that are often the source of post-acquisition surprises.

Each week, there is at least one cannabis-related deal on the list. At the same time, valuations of publicly traded cannabis companies have reached lofty heights, as south of the border, more states legalize the use of cannabis in some form, and here in Canada, investors anticipate a market expansion with the impending legalization of recreational marijuana.

This week, theNational Center for the Middle Market (NCMM)reported the results ofits Q4 2016 survey. The findings: on several key indicators, U.S. middle market companies are outpacing their larger and smaller counterparts, and private equity (PE) owned middle market firms continue to lead the pack. Read our full article to find out more.

“PE activity in the US middle market thwarted by competition”. This is a headline accompanying the release of Pitchbook’s U.S. PE Middle Market Report. But while overall middle market deal flow and deal value were down in 2016, it didn’t come as a surprise to us that the lower middle market (LMM) bucked this trend.

“NAFTA is the worst trade deal maybe ever signed…” The pervasive “trumpeting” of that rhetoric was heard throughout the recent U.S. election campaign. Finger pointing about unfairness in the context of North American trade was primarily directed at Mexico, with Canada sitting quietly on the sidelines. And, in fact, since the new administration has taken the reigns, there have been assurances that Trump is happy with the trade relationship with Canada.

A recentMcKinsey articlecrossed my desk this week. The article highlighted value creation inherent in organic growth versus growth by acquisition. The author noted that over a 15-year period, companies with more organic growth generated higher shareholder returns than those relying heavily on growth by acquisition. What is the explaination behind? Where does this leave us? Read our full article to find out more.

The abundance of private equity “dry powder” persists as a recurrent theme in 2017. As we note in this week’s blog, there is approximately US$749 billion in North America. And if we factor in leverage, with median debt financing running at 50.5% of U.S. M&A deals in 2016, buying power doubles to about US$1.5 trillion. There is more “powder” …but why is so much of it still “dry”? Read our full article to find out.

The past year ended on an interesting note for Canadian Private Equity (PE). When we last reported on Canadian VC and PE activity (Q3, 2016), there was a divergence in trends: VC surged ahead, while PE deal value plummeted. But the recently released Canadian Venture Capital and Private Equity Association’s2016 VC & PE Year in Reviewpaints a different PE picture.

At JP Morgan Chase, software is expediting the review of commercial loan documents, a process previously completed by lawyers and loan officers, which consumed about 360,000 hours per year.

And this is just the start. JP Morgan Chase will use Canadian fintech startup Dream Payments’ technology to roll out a mobile-payments service across Canada. Other bank/startup partnerships have formed as well over the past year.

US management consulting firm Bain & Company’s 2017 Global Private Equity Report summarizes key changes in the PE industry in 2016. The primary finding? PE firms are putting more emphasis on the importance of a strong advisory network, investment strategy focus and due diligence. These are factors Valitas regards as critical at a time when returns are ebbing to the downside, holding periods are lengthening, and competition for quality targets is rising, supported by high levels of available capital.

Top-ranked PE firms are citing three key strategic differences that are crucial to outperforming the competition. Read our full article to find out more.

“Dry powder at record highs.” This phrase has acquired cliché status in current Private Equity (PE) circles. According to Pitchbook, the global PE capital overhang hit a high of US$754 billion by June, 2016, with Prequin reporting the total as US$820 billion by year end. Worthy of note: more than 70% of that overhang comes from prior vintages, with 81.5% of capital raised in 2015 still to be deployed.

South of the border, middle market sentiment is bullish. Recently released Q1 2017 survey results reveal that U.S. middle market companies are outpacing their larger counterparts by a strong margin, with private equity (PE) owned companies leading the pack. And there is a notable level of optimism about the future.

U.S. middle market companies[1] generate 33% of U.S. private sector GDP, and as such, represent a significant economic force. From our perspective in Canada, this is a segment to watch for a couple of reasons. Read our full article to learn more.

How do they do it? In last week’s Valitas Insights article, we reported that the U.S. middle market is experiencing record levels of employment and revenue growth, but private-equity (PE) owned firms are way out ahead of the pack.

So again, how do they do it? We’ve previously discussed several factors underlying this outperformance, but a recent Harvard Business Review (HBR) article raises an additional compelling explanation. The article is aptly titled Finally, Evidence That Managing for the Long Term Pays Off (leaving no doubt about its contents). The authors contrast results generated by companies with a long-term outlook with those focused on “short-termism” - that is, a focus on quarterly earnings. PE firms, with their longer investment horizon, are a closer match to the former camp.

Know your Buyers is a three-part series by Valitas Capital Partners for business owners. It is designed to help owners consider the types of buyers that are in the market, how those buyers perceive value, and the advantages and disadvantages associated with each.

In this instalment of the series, Valitas discusses strategic buyers. Last month, we explored financial buyers and, in June, Valitas will present different business scenarios and how the type of buyer impacts sale strategy and the outcome in each case. Read our full article to find out more.

We are living in an M&A world where many acquisitions fail to create value. But the corollary, of course, is that some acquisitions DO create value, and the obvious question is why. In the current environment, where companies are relying more heavily on M&A to drive revenue growth, that’s a significant “why”, so we went looking for an answer.

We’ve discussed post-merger integration (PMI) as a critical factor in any successful M&A transaction. But a recent McKinsey article, The Six Types of Successful Acquisitions, takes a front-end perspective. The authors suggest that successful deals are initiated with specific and detailed value creation strategies, typically fitting with at least one of six archetypes. We will discuss the first three archetypes this week, and the remaining three in next week’s article, along with some overarching value creation principles.

We are living in an M&A world where many acquisitions fail to create value. The corollary, of course, is that some acquisitions DO create value, and the obvious question is why. In the current environment, where companies are relying more heavily on M&A to drive revenue growth, that’s a significant “why”, so we went looking for an answer.

We’ve discussed post-merger integration (PMI) as a critical factor in any successful M&A transaction. But a recent McKinsey article, The Six Types of Successful Acquisitions, takes a front-end perspective. The authors suggest that successful deals are initiated with specific and detailed value creation strategies, typically fitting with at least one of six archetypes. In last week’s article, we covered the first three archetypes. This week we discuss the remaining three, along with an overarching value creation principle.